Bond Bubble and the Coming 2nd Great Depression

The world is currently experiencing another bubble, but it’s not in stocks this time. A giant bond bubble is forming as the world watches without concern. The media sees the same signs that are available to everyone, yet they have not pointed out any of the problems that are going to arise. This bond bubble will likely cause another great depression much worse than the recession which we just experienced.

Current Bond Bubble

What if I told you that I wanted to borrow $1,000 from you for the next ten years, but instead of paying you interest, you would have to pay me interest? Would you do it?

What if you could make an investment that guaranteed you to lose money? Would you do it?

If the answer is NO to either of those questions, then you should be very careful buying or owning bonds right now. Those situations are exactly what is occurring in the government bond market. The latest sign of the bond bubble arose when today for the first time ever, the German Government’s 10 year bond, the Bund, started selling for negative interest rates. This means that people are now willing to pay the German government for the privilege to give them money. Does that make any sense at all? The irrationality which has been occurring in the bond markets as interest rates have dropped to zero or negative has been astounding.

Expected Results

Just as this bubble grew too big and eventually burst, so too will the current bond bubble. Government debts will eventually grow too large to be properly financed and interest rates will rise. This will likely create a cascading effect where interest rates rise throughout the world and government debt is no longer a safe haven for money.

Nothing good can come of this situation. Savers are now in a situation where they have no incentive to save money as they can’t earn interest without taking risks in the market. Meanwhile, governments have no reason to spend money wisely as they can cheaply issue debt at record low or negative interest rates. Bond owners WILL lose money. It is no longer a question of if, but a question of when.

Negative interest rates on debt are not sustainable and will lead to catastrophic effects if policy makers do not carefully handle the situation and focus on fixing it quickly. No matter what happens the results from here will be bad. Millions and billions of people will lose money if they are holding bonds. One of two outcomes can be expected. If the bond bubble bursts it will lead to a massive crash in the bond market. Alternatively, bond holders will spend years and perhaps decades slowly but surely losing the value of their money as the situation corrects.

The Coming Crash and the 2nd Great Depression

The crash caused by the bond bubble bursting would be far worse than the great recession which we just went through beginning in 2008. In the great recession the US stock market fell by 57% from October 2007 to March 2009. This represented trillions of dollars of investment value wiped out in the span of a year and a half. However, the global bond market is nearly twice the size of the global stock market. In 2010, global stocks represented $54 trillion in value, while global bonds represented $93 trillion. By 2014, the global bond market value surpassed the $100 trillion mark. The global bond market would only need to fall 33% in value to match the losses seen by the stock market crash of 2008. Meanwhile, if bonds crashed 57% like stocks did, then you’re looking at a loss in value approximately equal to the entire global stock market.

Do you own large amounts of bonds? Are you prepared in case the bond bubble bursts? How do you think this situation will resolve itself?

Share your thoughts in the comments below and if you found this article useful share it with your friends and family.

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About Trey Henninger

Trey is a private investment portfolio manager for his own personal funds. He began investing in 2011 and has over 7 years of experience managing an investment portfolio as well as performing fundamental stock and business analysis. Trey has been writing about his investing research, investing theory, and personal finance since 2015. He used thousands of hours of reading and learning to teach himself to invest and hopes to help other like-minded investors become DIY investors as well.

Trey graduated from the University of Texas with a Bachelor of Science degree in Chemical Engineering with a concentration in Engineering Economics and Business Leadership. He leverages this background in engineering economics to better identify and understand capital intensive and capital-light businesses. He has been quoted on Nerd Wallet, InvestorPlace, GoBankingRates and other online publications.

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